It’s hard to imagine living without a checking account these days. Online purchases? No problem. Automatic bill pay? Yes, please.
A savings account, though, can seem like a less flashy tool. If you’re making automatic deposits, then it’s quietly working in the background, or if you’re not actively saving, then it may feel unnecessary. Why open a separate account when you can just leave it in checking until you need it?
Actually, there’s an excellent reason. It’s called compound interest — and if you use it strategically, it can accelerate your savings.
How compound interest works
Compound interest is the phenomenon that allows investors to get rich and everyday people to retire. Einstein called it the “greatest mathematical discovery of all time.” But what is it?
When you store your money in a savings account, the credit union pays you interest for keeping it there. Interest is calculated as a percentage of your savings that gets added to your balance at regular intervals.
Each month, as your earnings pile up, your credit union will pay you more and more interest. The extra might amount to just pennies at first, but those pennies will turn into dollars over time.
“The wonder of compound interest transforms your working money into a state-of-the-art, highly powerful income-generating tool,” says Investopedia. “To work, it requires two things: the reinvestment of earnings, and time.”
Choosing the right savings account
To maximize your savings potential with compound interest, you want to get the highest interest rate possible.
Since checking accounts are meant to be transactional accounts you withdraw from frequently, many banks don’t pay any interest on them — no matter how high your balance. OCCU does, however. A new Remarkable Checking account, for example, pays a great rate on balances up to $20,000 if certain qualifications are met each month.1
But there’s something to be said for an account that’s less transactional. OCCU has a variety of savings accounts that will have you earning more and saving more. Start with an Ignite Savings account, which earns the highest rate for the first $500, and continued higher-than-average interest as your balance grows.4
If you’re ready to strategize your savings and create separate accounts for separate goals, you can supplement your Ignite account with secondary or money market accounts — as many as you need to reach your goals.
And while you’re encouraged to keep your money in savings accounts and earning the best interest rates, with OCCU savings accounts, your money is always accessible.
But if the temptation to shop is too great, and you want to discourage yourself from spending, a certificate of deposit gives you a guaranteed rate, but in exchange, you won’t be able to access your money without penalty for a certain amount of time.
There’s an account for every saving strategy!
With the right savings account and enough time, you can use compound interest to accelerate your savings potential. The faster your nest egg grows, the more secure your future will be.
